The Facebook Effect?

Well that was a short honeymoon.

Some large shareholders who participated in Facebook’s initial public offering have turned around and sued the company, its CEO, and its bankers claiming that just before the IPO the company and bankers materially lowered their revenue forecasts for next year and didn’t tell them. That, they claim, is why the stock declined almost 20% after launching at $38 per share, almost 100 times last year’s earnings.

I suppose it’s the American way to find someone to sue when something goes wrong, but this is ridiculous. When you play the lottery, you can’t sue the State when you lose. Facebook is a young company with an evolving business model and an inexperienced CEO. In a late filing with the SEC the company disclosed that users are growing faster than ad revenue. Well, duh. Facebook’s challenge of turning users into revenue is hardly breaking news.

Besides a coming at a grotesque price, the company increased the number of shares on offer by 25%, and days before the IPO the news wires were full of the story that GM was pulling its miniscule ad presence from the site. The fact that analysts used the late S-1 amendment to revise their revenue estimates doesn’t mean they broke the law.

Still, this will be a distraction for Zuckerberg. He may have masterfully managed the social-networking mosh pit that was bubbling in 2004, dealing with an aggressive press, lawsuits, and technological problems, but now he has to deal with the SEC, Nasdaq, FINRA, and other alphabet-soup regulatory agencies who are obligated to investigate whenever a crybaby investor complains.

The real victims of the Facebook fiasco may be other tech firms that were hoping to go public. It’s taken 10 years for the tech IPO market to thaw after the dot-com bust. If these problems put it back into a deep freeze, we’ll all feel the chill.

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